Pricing Strategy over the Life Cycle – Chs. 7-8 •Review Fire Safety Homework •Understand how price sensitivity, costs, and competition influence pricing strategy over the product life cycle. •Introduce organizational tools and diagnostic analytics that can be used to identify and overcome implementation challenges
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Pricing Strategy over the Life Cycle – Chs. 7-8 Review Fire Safety Homework Understand how price sensitivity, costs, and competition influence pricing.
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Pricing Strategy over the Life Cycle – Chs. 7-8
• Review Fire Safety Homework• Understand how price sensitivity, costs, and
competition influence pricing strategy over the product life cycle.
• Introduce organizational tools and diagnostic analytics that can be used to identify and overcome implementation challenges
Breakeven Sales as a % of 2010 Sales (1+/- Incremental Breakeven %)
Expected 2011 Sales as a % of 2010 Sales (No price change; Market Growth = 29%)
Breakeven 2011 Sales as a % of 2010 Sales (5% Price Increase; Growth = 29%)
Actual 2011 Sales as a % of 2010 Sales
Quantity % Above/Below Breakeven (2010 basis)
Quantity % Above/Below Breakeven (2011 basis)
Fire Safety: 1. Given overall market growth rate = 29%, Fire Safety’s 5% price increase in FY 2011, & 2010 CM≈62%, what was Fire Safety’s incremental % breakeven point for unit quantity and $ sales change in FY 2011? How does that compare with actual 2011 unit quantity and $ sales changes.
Breakeven Sales as a % of Sales (1+/- Incremental Breakeven %)
Expected 2012 Sales as a % of 2011 Sales (No price change; Growth = 44%)
Breakeven 2012 Sales as a % of 2011 Sales (5% Price Increase; Growth = 44%)
Would you recommend the 5% price increase to FSI management for FY 2012? Why (not)? What would you recommend?
Fire Safety: 2. Given the expected market growth rate of 44%, Fire Safety’s proposed 5% price increase in FY 2012, & 2011 CM ≈ 64%, what is Fire Safety’s incremental percentage breakeven point for unit quantity and $ sales change in FY 2012?
Few competitorsGains from market development are high
Market Dynamics over the PLCGROWTH MATURITYINTRODUCTION
PLC & Brand Strategies
Brand StageLaunch
Maintenance
Retirement
Product Category Life CycleIntroduction
Price to establish, communicate & promote value of the product
N/A
N/A
GrowthBased on LT strategy, identify appropriate segment(s) before commercialization
Segment & target for LT advantage. Lower price as necessary to maintain market growth. Price compete only to gain cost advantage.
Price to clear inventory quickly while launching new models
MaturityUse aggressive pricing to dominate based on cost advantage or target underserved niches w/a service advantage.
Unbundle. Price products & services separately. Rationalize product line & distribution strategy. Price to maximize profit, not market share or growth.
Slowly price yourself out of business.
DeclineNot recommended.
Only with strong advantage. Consolidate to solidify cost or service leadership.
Price to establish, communicate & promote value of the product
N/A
N/A
GrowthBased on LT strategy, identify appropriate segment(s) before commercialization
Segment & target for LT advantage. Lower price as necessary to maintain market growth. Price compete only to gain cost advantage.
Price to clear inventory quickly while launching new models
MaturityUse aggressive pricing to dominate based on cost advantage or target underserved niches w/a service advantage.
Unbundle. Price products & services separately. Rationalize product line & distribution strategy. Price to maximize profit, not market share or growth.
Customer Lifetime Value (CLV)Useful Analysis at the Individual Customer & Segment
CLVinfinite lifetime = CM/(i* + 1 – r) – ACwhereCM = average annual contribution for the customer (segment)
i* = i (=the risk-free discount rate) × risk factorr = retention rate for the customer (segment)AC = acquisition costs
How valuable/profitable is each customer (segment) given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs?
How valuable/profitable is an acquisition or retention campaign given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs?
Customer EquityFacebook April/May 2012
At Facebook• April 2012 Unique Users: 900,000,000 • Revenue ≈ 3.7 B; CM (90%) ≈ $4; i* = .05; r = .95• CLV ≈ $40
• Customer Equity = #Users × CLV = $36 B
= # Customers × CLVCustomer Equity
External Valuation May 2012: ~$100 B
Customer EquityFacebook July/August 2012
At Facebook• July 2012 Unique Users: 955,000,000• Revenue ≈ 4.7 B; CM (90%) ≈ $4.4• CLV ≈ $44